Series 6 Practice Questions by Topic

Answer: Prohibited, because it implies a guarantee and omits the fund's investment risk

FINRA Rule 2210(d)(1) requires communications to be fair and balanced, to provide a sound basis for evaluating the facts, and to omit no material fact whose omission would make the communication misleading. Rule 2210(d)(1)(B) bars any false, exaggerated, unwarranted, promissory or misleading statement, and Rule 2210(d)(1)(D) requires balanced treatment of risks and potential benefits. Comparing a fluctuating, uninsured bond fund to an insured bank deposit fails both. The same (d)(1) standards apply to a representative's live remarks under Rule 2210(f)(1).

The Trap: Treating an analogy or an 'in my opinion' framing as a way around the fair and balanced standard.

• Permitted if the fund holds only investment-grade bonds: Misconception: credit quality does not eliminate interest-rate risk, and no fund carries deposit insurance. Holdings quality does not cure the comparison.
• Permitted because the comparison is offered as an opinion: Misconception: labeling a claim an opinion does not exempt it. Rule 2210(d) requires a sound basis for evaluating any claim, and prohibits false, exaggerated, and misleading statements however framed.
• Permitted if a prospectus is delivered afterward: Misconception: prospectus delivery does not cure a misleading oral statement. The two obligations are independent.

Verified against: FINRA Rule 2210(d)(1) and 2210(f)(1)

Answer: Solicit indications of interest from prospective investors

Under the Securities Act of 1933, the period between the filing of a registration statement and its effective date is the cooling-off period. During it, a preliminary prospectus (red herring) may be distributed to solicit non-binding indications of interest. No sales may be made, no money or orders may be accepted, and advertising is limited to forms the SEC's rules allow, such as a tombstone under Rule 134. The final prospectus, with the public offering price, is used once the registration is effective.

The Trap: Reading an indication of interest as a binding order, or thinking a red herring lets a firm take money early.

• Accept payment from customers who want to reserve shares: Misconception: no money may be accepted during the cooling-off period. Payment can only be taken once the registration statement is effective and the final prospectus is available.
• Confirm sales that were agreed to before the registration statement was filed: Misconception: offers and sales are both prohibited before filing. Nothing agreed to in the pre-filing period can be confirmed.
• Guarantee an allocation to investors who indicate interest early: Misconception: an indication of interest is not binding on either party, and no allocation can be promised.

Verified against: Securities Act of 1933 Section 5; SEC Rule 134

Answer: Deliver a prospectus to each person who is sent a confirmation of a sale

Sections 5(b) and 2(a)(10) of the Securities Act of 1933 require a prospectus to accompany or precede the confirmation of a sale and the delivery of the security. Rule 15c2-8 under the Securities Exchange Act of 1934 adds duties for firms participating in a distribution, such as taking reasonable steps to send a final prospectus promptly to anyone who asks for one in writing. Because open-end investment company shares are in a continuous offering, every purchase is a primary sale and every purchaser gets a current prospectus, at or before the confirmation. Rule 498 allows a summary prospectus to be delivered instead, provided the statutory prospectus is available online and delivered free on request.

The Trap: Assuming prospectus delivery is a request-driven courtesy, when for a continuously offered fund it attaches to every sale.

• Deliver the statement of additional information in place of the prospectus: Misconception: the SAI supplements the prospectus and is delivered free on request. It is not a substitute for the prospectus.
• Deliver a prospectus only on request: Misconception: prospectus delivery for a continuously offered fund is affirmative, not on request. Only certain supplemental documents, such as the statement of additional information, are furnished on request.
• Deliver a prospectus within 90 days of the sale: Misconception: 90 days is the aftermarket period in Section 4(a)(3) during which dealers in some new issues must still deliver a prospectus, not a grace period for sending one. Delivery accompanies or precedes the confirmation, not months later.

Verified against: Securities Act of 1933 Sections 2(a)(10) and 5(b); SEC Rule 15c2-8; SEC Rule 498

Answer: The statutory prospectus and the statement of additional information must be available online and sent free on request

SEC Rule 498 permits a fund to satisfy its prospectus delivery obligation with a summary prospectus in a prescribed order covering objectives, fees, principal strategies and risks, past performance, management, and purchase and tax information. The condition is accessibility: the statutory prospectus, the statement of additional information, and the most recent annual and semi-annual reports must be posted at a specified website and sent free of charge on request.

The Trap: Treating the summary prospectus as a shorter filing rather than as a delivery option conditioned on online availability of the full documents.

• The summary prospectus must contain 10 years of standardized performance in every case: Misconception: the summary prospectus contains the standardized risk/return bar chart and table, but a fund with a shorter operating history presents only the periods it has.
• The summary prospectus may be delivered up to 30 days after the confirmation: Misconception: this borrows a nonexistent grace period. Delivery accompanies or precedes the confirmation like any prospectus.
• The statutory prospectus need not be filed as long as the summary prospectus is complete on its face: Misconception: the summary prospectus is a delivery vehicle, not a replacement filing. The statutory prospectus must exist, be current, and be accessible.

Verified against: SEC Rule 498

Answer: $10,000,000

Rule 504 of Regulation D exempts limited offerings up to an aggregate of $10,000,000 in any 12-month period. The ceiling was $1,000,000 until 2017, then $5,000,000, and was raised to $10,000,000 effective March 15, 2021 by the SEC's exempt-offering harmonization amendments. Rule 506(b) and 506(c) have no dollar ceiling; 506(b) permits up to 35 non-accredited but sophisticated purchasers with no general solicitation, while 506(c) permits general solicitation but requires all purchasers to be accredited and verified.

The Trap: Quoting the $5,000,000 Rule 504 ceiling that appears in materials written before the March 2021 amendment.

• $1,000,000: Misconception: this is the old pre-2017 Rule 504 ceiling. It has been raised twice since.
• $75,000,000: Misconception: $75,000,000 is the Regulation A Tier 2 ceiling, a different exemption entirely.
• $5,000,000: Misconception: $5,000,000 was the Rule 504 ceiling from January 2017 until March 2021, and it still appears in outlines and prep material published before the amendment.

Verified against: SEC Rule 504 of Regulation D, as amended effective 2021-03-15

Answer: Exempt from federal registration but still subject to State X's securities law

Section 3(a)(11) of the Securities Act of 1933 exempts securities offered and sold only to persons resident within a single state by an issuer resident and doing business in that state. Rule 147 is the safe harbor for that exemption, with conditions on the issuer's in-state business and on resales. Because the exemption is federal, the offering remains subject to the state's own registration and antifraud provisions, which is why intrastate offerings are the standard example of blue-sky law still applying.

The Trap: Assuming that any federal exemption also clears state registration, when the intrastate exemption specifically does not.

• Exempt from state registration but subject to federal registration: Misconception: this reverses the analysis. Rule 147 is a federal safe harbor; it does not touch state law.
• Exempt from both federal and state registration: Misconception: a federal exemption never displaces state law here. The intrastate exemption is the classic case where blue-sky registration still applies.
• Exempt only if the issuer also files a Form D with the SEC: Misconception: Form D is the Regulation D notice filing. Rule 147 is a separate exemption under Section 3(a)(11) and does not use Form D.

Verified against: Securities Act of 1933 Section 3(a)(11); SEC Rule 147

Answer: A U.S. Treasury note

Section 3(a)(2) of the Securities Act of 1933 exempts securities issued or guaranteed by the United States, and Section 3(a)(2) also covers municipal securities and certain bank issues. Investment company securities and variable contracts are not exempt: they are registered under the 1933 Act, and the funds themselves register under the Investment Company Act of 1940. A fixed annuity is an insurance product rather than a security, and is not sold under a securities registration at all.

The Trap: Grouping variable annuities with fixed annuities as insurance products outside the securities laws.

• Shares of an open-end investment company: Misconception: mutual fund shares are registered securities in a continuous offering. The fund registers under both the 1933 Act and the Investment Company Act of 1940.
• A closed-end fund's shares sold in its initial public offering: Misconception: a closed-end fund's IPO is a registered offering sold with a prospectus, and it is the only closed-end fund activity a Series 6 registration permits.
• A variable annuity separate account interest: Misconception: variable contracts are securities because the contract owner bears the investment risk. They are registered, which is why a securities license is required to sell them.

Verified against: Securities Act of 1933 Section 3(a)(2)

Answer: The names of the underwriters and the anticipated offering price range

SEC Rule 134 describes communications not deemed a prospectus. A tombstone may state the issuer's name, the title and amount of the security, a price or price range, the names of the underwriters, and where a prospectus may be obtained. Before the registration statement is effective it generally must also carry a legend that a registration statement has been filed but is not yet effective, and that the securities may not be sold, nor offers to buy accepted, until it is. It cannot contain performance projections, recommendations, or any suggestion that the SEC has approved the offering.

The Trap: Believing a tombstone is an advertisement that can sell the deal, when it is limited to identifying facts and a pointer to the prospectus.

• A recommendation that investors buy the security: Misconception: a tombstone cannot recommend that investors buy. Rule 134 material is not deemed a prospectus precisely because it is limited to identifying facts.
• Projections of the issuer's earnings for the coming three years: Misconception: projections are never permitted in a tombstone, and forecasting performance is separately prohibited in FINRA communications.
• A statement that the SEC has passed on the merits of the offering: Misconception: the SEC never passes on the merits of an offering, and Section 23 of the Securities Act makes it unlawful to tell a prospective purchaser otherwise.

Verified against: SEC Rule 134

Answer: A prohibited misrepresentation of the security's nature

Municipal fund securities, including 529 college savings plans and local government investment pools, are defined by MSRB Rule D-12 and sold under an official statement rather than a prospectus. The sponsoring state does not guarantee the account value; the investor bears the investment risk of the portfolios selected. MSRB Rule G-17 requires dealers to deal fairly and prohibits deceptive, dishonest, or unfair practices, and a guarantee representation violates it.

The Trap: Confusing the state's role as plan sponsor with a guarantee of the account's principal.

• Acceptable if the state sponsors the 529 plan: Misconception: state sponsorship of a 529 plan is not a guarantee of the underlying investment options. The account value fluctuates with the portfolios selected.
• Acceptable if the underlying portfolio holds only government securities: Misconception: a portfolio of government securities still carries interest-rate risk, and a fund is not guaranteed even when its holdings are.
• Acceptable if the representative also delivers the official statement: Misconception: disclosure documents do not cure a misrepresentation made in the sales conversation.

Verified against: MSRB Rule D-12 and MSRB Rule G-17

Answer: Name, date of birth, residential or business street address, and identification number

The customer identification program rule requires a broker-dealer to obtain, at a minimum, the customer's name, date of birth (for a natural person), address (a residential or business street address for an individual), and an identification number (a taxpayer identification number for a U.S. person). The firm must then verify identity within a reasonable time, using documentary or non-documentary methods, and check government lists such as OFAC's specially designated nationals list.

The Trap: Mixing the four CIP identity elements with the financial profile items collected for suitability.

• Name, date of birth, email address, and telephone number: Misconception: contact details are useful account information but are not the required identity elements. A physical street address is required; a post office box alone will not do.
• Name, employer, annual income, and net worth: Misconception: income and net worth are investment profile items collected for suitability under Rule 2111 and Regulation Best Interest. They are not CIP identity elements.
• Name, citizenship, investment objective, and risk tolerance: Misconception: objective and risk tolerance are profile items, not identity verification items.

Verified against: 31 CFR 1023.220 (USA PATRIOT Act Section 326 CIP rule); FINRA Rule 4512